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Dr. Michael Hasenstab: Three Things We Think the Market Misinterpreted

The first thing we think the market has misinterpreted relates to the question: Is the fall in oil due to a decline in demand, or is it due to a change in supply? It is our assessment that due to political reasons, the price of oil is really a function of change in supply, particularly driven out of the Saudis and OPEC.

The second thing we think the market has misinterpreted has to do with the sequencing of effects of the fall in oil prices. We expect the effects of changing dynamics in the oil markets to have, over time, an aggregate positive impact on the U.S., as well as globally.

The third dynamic has to do with inflation related to the fall in oil prices. We think the market is getting lulled into a sense of comfort: Just because you’re seeing headline inflation numbers come down now, we don’t expect that to last.

Important Legal Information

The information provided is not a complete analysis of every material fact regarding any country, region, or market. Comments, opinions and analyses contained herein are those of the portfolio manager and are for informational purposes only. Because market and economic conditions are subject to change, comments, opinions and analyses are rendered as of January 20, 2015, and may change without notice. The analysis and opinions expressed herein may differ or be contrary to those expressed by other business areas, portfolio managers or investment management teams at Franklin Templeton Investments. Opinions are intended to provide insight on macroeconomic issues and commentary is not intended as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy.

What Are the Risks?All investments involve risks, including possible loss of principal.

Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. Currency rates may fluctuate significantly over short periods of time and can reduce returns. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline.

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